Spain defers decision on banks

Spain plans to release two independent reports on the condition of its banks, which the government has said it is awaiting to help determine how much of its bailout offer of €100 billion ($125 billion) it actually needs.

A ballpark figure of about €60 billion is widely assumed.

And any subsequent, deeper audit of the murky loan portfolios of the most troubled Spanish banks is likely to take time that the Spanish government simply does not have.

Spain is being accused of dithering over the details of the bailout process at a time when the financial markets are eager to know what steps the government of Prime Minister Mariano Rajoy wants to take to fix the underlying problems of its banking system.

“I don’t think Mariano Rajoy’s government will be capable of restoring investor confidence because too much has been lost already, and constant stand-offs with
Angela Merkel
over timing and conditions are only making things worse," said Edward Hugh, an economist based in Barcelona, referring to the German Chancellor. Eventually, he predicted, “Spain will need a full bailout and very strict conditions and monitoring".

The latest test of market sentiment will come overnight, Australian time, when the Spanish Treasury plans to sell as much as €2 billion in bonds, even as its borrowing costs reach record levels.

Whatever the findings about its banks are, the Spanish government has insisted that it will not shut crippled institutions.

That €60 billion figure was reflected in a separate analysis by credit agency Fitch Ratings. Fitch estimated a capital shortfall for the domestic loan portfolio of Spanish banks of €50 billion to €60 billion under a favourable simulation. But that figure could rise to €90 billion to €100 billion under worse conditions – along the lines, say, of the banking collapse in Ireland.

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The reports are being put together by Oliver Wyman and Roland Berger Strategy Consultants, two consulting groups retained by the Spanish economy ministry in May, giving them just a month to work out how much extra capital the banking sector would need to stay afloat.

They were hired after troubles arose at Bankia, a giant mortgage lender nationalised in early May which is in line to receive €19 billion of the rescue capital offered by Europe.

The credibility of stress tests has suffered considerably from flawed efforts to use them earlier in the debt crisis, most notably by the European Banking Authority. The authority gave clean bills of health to Irish and Spanish banks, whose losses subsequently turned out to be significant enough to require bailouts.

“Unfortunately there is no easy solution – stress tests have become a key part of the tool kit in dealing with the reshaping of banks," said Nils Melngailis, a managing director in London at Alvarez & Marsal, a consulting group that was involved in assessing Greek and Irish banks. But such stress tests, he added, “need to be carefully calibrated to be credible".